Xavier Rolet: End the discrimination on equity funding for small firms


The CEO of the London Stock Exchange demands the abolition of stamp duty for AIM and PLUS-quoted shares

Four years on from the start of the credit crisis and there is a strong and growing consensus as to the reasons for the fallout that affected economies and communities around the world. There are also some increasingly obvious lessons that we can learn.

The London Stock Exchange Group is the backbone of the UK financial community and with this comes great responsibility. The group is actively engaged with policy influencers, market participants and government in focused debate, planning and implementation, working together to build a rebalanced economy. It believes that London and the UK would prosper if there was greater appetite for personal saving, a re-equitisation of our funding environment and a renewed focus on the growth opportunities provided by our world-class SMEs.

UK economic recovery – and the long-term ability to address the UK debt mountain – can only be secured by harnessing the growth and innovative nature of smaller companies. This is especially true amongst the innovative “three tech” sectors – high, clean and bio – in which the UK has global leadership.

Such alternative finance streams can offer a much-needed economic “spare tyre”, providing capital when bank lending is reduced or too inflexible to meet the needs of growth businesses

We would like to see a greater nurturing of these SMEs, which will be the corporate giants of tomorrow. We also need to achieve this through a fundamental rebalancing of the economy away from an excess of bank finance towards a more stable financing system for UK business; one built on a diverse source of growth funding, with equity playing an equal, if not greater role than bank lending. Such alternative finance streams can offer a much-needed economic “spare tyre”, providing capital when bank lending is reduced or too inflexible to meet the needs of growth businesses.

The equity funding ladder is crucial to supporting these companies throughout their development, from seed capital, business angels to venture capital and public markets. For the ladder to work, each level of investor must be confident that they can sell their holding at a later stage and reinvest in the next generation of promising entrepreneurs.

The London Stock Exchange and its various debt and equity markets has been working hard to find ways to support SMEs, building on our experience as the operator of the AIM growth market, which since being launched 16 years ago, has helped over 3,200 companies raise more than £75bn at admission and through further fundraisings.

It is the small businesses, family-owned organisations and entrepreneurs that will be the powerhouses of a revived UK economy. There are 23 million SMEs in the EU, with 4.8 million in the UK alone. It is more realistic for each of them to add one job, creating 4.8 million new jobs and getting rid of unemployment in this country, than it is for each of the FTSE 100 to create 48,000 jobs. If we succeeded in generating one new job in each SME then the effect would be transformative.

A Grant Thornton report published earlier this year demonstrates this: it found that in 2009, UK AIM companies directly contributed £12bn to UK GDP and supported 250,000 jobs, They contributed a further £9bn to UK GDP and supported 320,000 jobs indirectly through the supply chain and multiplier effects.

To remain competitive, and to drive economic growth, the UK must create an environment where the blue chips of tomorrow can thrive today. 

Arguably the most significant barrier to efficient access to equity funding for companies of all sizes is the tax treatment of equity

As a group, we have been at the forefront of discussions calling for improvements to the tax policies for SMEs. With good, straightforward, attractive access to funding, SMEs will be able to create jobs and drive growth. Arguably the most significant barrier to efficient access to equity funding for companies of all sizes is the tax treatment of equity.

While other asset classes such as bonds and cash are subject only to income tax, equities are taxed at purchase, dividend and sale, in addition to the corporation tax paid on company profits. We believe that reducing the tax rate on capital gains made from direct and indirect investment in smaller companies would help boost liquidity as it would help attract more investors. A targeted abolishment of stamp duty for AIM and PLUS-quoted shares would be a particularly low-cost, effective intervention on behalf of these key drivers of growth.

As well as incentivising equity investment for SMEs, the London Stock Exchange Group is looking at ways to boost UK corporate access to fixed-income finance. Last year, we launched the UK’s first retail accessible bond market, ORB which, we think, offers a whole new pool of finance for UK businesses. ORB offers companies the opportunity to issue corporate debt, in small tranches, making them attractive to both retail and institutional investors on a regulated, cost-effective and transparent electronic market.

Since launch we have seen nearly £1bn raised, including £140m for our first corporate issue by the UK housing association group, Places for People.

However, direct investment in corporate bonds is often overlooked in favour of investment bonds even though they can be held directly within ISAs and SIPPs. We believe that the introduction of a separate ISA savings level for bonds, say at £2,000, would kick-start interest in this asset class and encourage a savings and investment culture.

There is much to do to help rebuild confidence in our economy, but by supporting our entrepreneurial, innovative SMEs through simple, low-cost access to funding we can have a big impact. The London Stock Exchange Group is committed to supporting the long-term health of our economy and to the communities and families it supports.

We are committed to promoting and supporting our world-class SMEs through the advocacy of a diverse balanced funding ecosystem, and the championing of innovation, job creation and growth.

Xavier Rolet is the chief executive of the London Stock Exchange Group. Previously he was a senior executive at Lehman Brothers and, most recently, CEO of Lehman in France. Before Lehman Brothers, he held senior positions at Dresdner Kleinwort Benson, Credit Suisse First Boston and Goldman Sachs.